A U.S. Government Accountability Office (GAO) team is telling Congress that taxpayers can abuse private placement variable life insurance.
The GAO team looked at the product for Sen. Charles Grassley, R-Iowa, the chairman of the Senate Finance Committee. The team focused on two types of offshore insurance: micro-captive insurers controlled by U.S. businesses, and private placement variable life insurance.
Jessica Lucas-Judy, a GAO director, wrote in a report on the GAO team’s findings that there are many legitimate uses for offshore life insurance products.
But an Internal Revenue Service official said “offshore variable life insurance products have been used to conceal assets from the U.S. government, including undeclared assets at risk of being discovered during investigations of foreign banks,” Lucas-Judy wrote in the report. “Further, some taxpayers closely control how their premiums are invested and may direct premium funds toward illiquid assets they currently own in an attempt to convert taxable income to tax-exempt income that is eventually passed on to their beneficiaries tax-free.”
- A copy of the GAO offshore insurance report is available here.
- An article about an IRS regulation effort that referred to private placement life insurance and annuity products is available here.
The IRS has been clashing with taxpayers and their tax advisors over offshore insurance arrangements for years. The GAO prepared the report partly to summarize the history of IRS efforts to police offshore insurance arrangements.
The U.S. Supreme Court agreed in May to take up an offshore captive insurance case, CIC Services v. IRS. The case hinges on a question about rules governing legal challenges to regulatory mandates that are not taxes, rather than on insurance tax rules.